Saturday, May 28, 2011

At the very least, I think government should get out of the rate-setting game.

Interest rate-setting is a crucial function of the private market. It is by this mechanism that we arrive at the price of debt and investment. Too low a price and you encourage more debt and speculation. Too high a price and you kill the market itself. Is this crucial mechanism market mechanism best served by leaving it up to the will of unelected technocrats? People who insist on 'independence' and non-accountability of action? How does the general public even know why they arrive at the decisions they do? Why do they keep on lowering rates when there is too much debt and speculation in the market already? Why would they suddenly jack up the rates just when the real businessmen are starting to undertake long-term investment? When they have to make a decision where the interest of a few large capitalists are in conflict with the interests of a larger but more diffuse set of businessmen, whose interest prevails in the end?

In short, do central bankers really have a positive value to the efficient rate-setting of the market? My gut says not really. More often than not, we've seen government intervention in this area only creates speculative bubbles and unnecessary recessions, which would have otherwise been avoided, if government had only let the market decide the price level of interest rates. This control of the monetary rates subjects the entire economy's price level and inflation and deflation on the whims of a few technocrats with little or no accountability to the people. The only use I see for ceding private sector control to the government is to use this as an international trade war weapon.

Central bankers have always said that they do not have any control over bubbles. When humans want to believe in something, they can make it so. If they believe that something will go up in value, then it will go up in value, low rates or not. If central banks cannot cause bubbles, as they have always said, from Greenspan on to Bernanke, then they cannot also do anything to burst them. If rate setting and quantitative easing do not affect the market , then what is the purpose of giving central banks the lever that can influence human beliefs? Haven't we seen that QE2's objective is precisely to influence the beliefs of the market? QE2's plan after all was to cause the price of financial assets to appreciate, because this makes people feel they are wealthier, and therefore more open towards purchasing more. QE2's intended mechanism is that rising monetary base increases inflation expectations, such that people begin to purchase things now rather than later. But instead of causing more purchasing velocity in the real economy, QE2 instead jacked up speculation.

From the time of Greenspan, we've seen how central bank rate-setting can unduly affect how the market speculates. The process has always been – lower interest rates – bond investors hunt for higher yield (more risk) and this leads to a bigger bubble than without the lower rates, as speculation is now turbocharged by greater leverage. When the bubble deflates, the losses are larger, and the downturn is steeper, as investors take stock of their losses and deleverage. As we saw during QE2, we saw that central bank rate-setting can actually disrupt the market,even at the zero level bound. At the end of the day, the central bank looks nothing more than a glorified asset price jockey.

And then, if we are to believe the all-encompassing usefulness of monetary policy to pick up the pieces each time a bubble bursts, we should believe that monetary easing should always do the trick. Will we reach to QE9? QE10? After all, if we truly belive there’s no problem that can’t be solved by lowering nominal interest rates, throwing more money into the economy (and thereby lowering real rates into negative territory) then it doesn't make sense to believe that we will ever reach a point where this doesn't work or make sense any more. Either it really works, or it never really worked. More likely, it only seemed to work, while delaying the inevitable, by 'kicking the can down the road' and extending the bubble until the next central banker ends up with a bigger mess.

The central bank should just set and maintain a fixed rate for its discount window. If the securities and commodities investment markets are becoming frothy and possibly bubbly, that should have nothing to do with the reality of the real economy businessman's world, and should be separated in the central banker's decision-making process of whether to burst that possible bubble. The discount rate could be kept steady while just going after the offending speculators, and imposing more taxes and regulatory overview on that particular offending sector only. Everybody else shouldn't be made to suffer just because a bunch of hooligans are trying to game their particular market to make a little more money.

I could be persuaded by the suggestion to just abolish the Central Bank. If we do away with the central bank altogether, its function of money issuance can be integrated with Treasury, thereby doing away with a possibly unnecessary layer of bureaucracy and possible loss of transparency and accountability. Some MMTers have already written on this.

If it stays, its most useful function would be just to ensure that private players keep playing by the rules (play fair) and follow macroprudential controls, so they don't develop dangerous bubbles all by themselves. We should start focusing more on what macroprudential controls should be in place once instead, so that private sector-led bubbles do not get out of hand either.

The central bank needs to be a stronger regulator. If we want borrowers and small investors to be protected from the vagaries of the market, it has to step up. If a certain level of rates can influence the creation of bubbles (and I believe this to be so), and the effect is transmitted in the market via financial entities that are beyond central bank purview, such as money market funds, hedge funds, pension and insurance funds, shouldn't it then be regulating everybody else's speculation/investment activities?

I'm not yet clear on its keeping the lender of last resort function. This function is important in preventing some bank failures from developing into full-blown systemic crises, but if it encourages moral hazard, this function becomes self-defeating. If a central bank can ensure individual players always follow macroprudential rules, a lender of last resort will be barely necessary. In those few times when there's a failure of regulation, we should penalize both the regulated, and to some extent, the regulator.

Proving the regulator could see the failure coming will always be the tricky part though. But the posibility of being penalized should concentrate the minds of the regulator. And if the regulator is being paid a salary commensurate to what he's doing, i.e., a salary similar to those he's supposed to be regulating, we should have no problem retaining highly-competent regulators who are constantly on top of what the private sector financiers are doing. But this is a discussion for a separate time.

Tuesday, May 24, 2011

Several of the last few posts seem to elicit reaction from commenters who believe we shouldn't let government intervene in what would better be left as private affairs. While I agree that we shouldn't allow government to grow beyond its most prudent scope of state functions, I think the discussion should be more nuanced as to what is in the government's practical realm, and what should be left to the private sector. Here are four nuances that came up in comments of the last few posts:

1. How much government authority should there be in terms of regulating the private sector. I believe government's authority should be enough such that it can effectively enforce rules and regulations that best keep the private sector honest and well-functioning. This does not mean we want a government composed of control freaks who micromanage the affairs of the people.

A failure of government regulation means a need to change the regulator, not a complete stop to regulation itself. When we don't like what government is doing, we do what we can to effect a regime change. We don't say 'To heck with it, I'm my own government now'.If people are completely free to do what they want, we will soon have control freaks in the private sector taking over and impinging their own will on other people's rights. There will be no accountability for these private sector control freaks if there is no countervailing force against what they do. Hence it would be a race among every one of these types on who grabs the most overall control first so no one can else can take it instead.

Think of traffic in a busy highway. People will travel as fast as they can and cut other people, without regard to the danger they may cause to other people, for as long as they can get to their destination sooner. A countervailing force so people don't do this all the time is the threat of getting caught and getting a ticket. But there needs to be regulations first.

Without publicly acceptable regulation in the first place, there are no laws violated, and the government has no business prosecuting anyone.

2. What practical matters of operations should the state involve in. I believe government should involve in activities where absolute maintenance of people's trust about value and reliability is of utmost importance. Currency issuance is an important area, as my previous post highlighted.

The state should always issue the circulating currency. This is the only way to make it acceptable to any party that may enter the endless chain of transactions that would involve payment in this currency. No government backing, and the chain will unravel.

By comparison, I see private bank-issued currency as similar to equity stocks issued by private corporations. People buy them or accept them because of the belief that they can be sold or exchanged for state-backed money. People exchange their state-backed money for stocks because of the speculation that the stocks may rise in value vs. holding onto state money. But at the end of the day, that stock could lose value or even become worthless if the company that issued it became bankrupt. I believe the same with banks and private currencies. These currencies have value only to the extent that people can redeem them from the issuing bank for state money.

For example, checks and credit cards issued by banks have value because they are interchangeable at face value for base money. People who accept checks and credit cards expect to eventually exchange them for state money, which is what they can in turn use to pay for their own purchases. The thing about checks and credit cards is that they can only be accepted by the person directly transacting with the issuer. They involve private transactions involving directly transacting parties. For example, if you give me a check or pay me by credit card, I can't then turn around and use your check or your credit card to pay for my purchase with somebody else.

I would probably be open to the idea of granting private banks the license to issue private money, but even if we ever have private-issued currencies, they should always be complemented by state-backed money. People should have the choice to accept only state money if they want. If anybody wants to accept currency that can be suspended at will by a private issuer, then that's their business. But people who want to accept only state-backed currency should be free to do so. We should not impose on them a world where only privately-issued (and therefore susceptible to private suspension) currency exists.

I myself may have no qualms about accepting private bank-issued money, for example, but only for as long as I am directly dealing with the bank issuer. I would never accept private bank-issued money from someone else who dealt with the issuer himself, not without guarantees of that other person himself. And no other person should be influenced to accept private-issued money on the argument that it's better than state-backed money.

Only sophisticated investors should accept private currencies. There's a large element of speculation to it, and most people, who only want to get paid for goods and services rendered, will always want money they know will have universal acceptance when they in turn decide to spend it. A currency that is susceptible to instances of suspension is an assurance that that currency will fail. Currency allowed to circulate among the public always has to redeemable and convertible into the asset it has promised to convert to, or it is not acceptable currency at all.

Most banks only have 10% equity at the most. When the price of commodities backing their private currency loses even just this amount, these issuers are already insolvent. Further, I believe there's barely any earnings in issuing currency, unless you plan on counterfeiting it, and suspending conversion once this counterfeiting becomes evident. If private-issued currency recipients become poorer, and issuers richer, because of a suspension of convertibility, then fraud has been committed, and the issuer doing so needs to go to jail.

If you think the fed is doing a crime devaluing the currency, you should be even more leery of a private issuer with a profit motive doing the same. A Government issuing the currency can debase the currency, but so can private banks. Private banks with a profit motive even more so than the government. And if the banks find themselves insolvent, which is possible, they being private companies, they have every reason to debase their currency, or suspend conversion.

3. Should government increase spending in a depressionary economic environment. A growing economy creates the credit and demand growth necessary to sustain itself without government deficit spending. Conversely, in a depressionary environment, where people are conserving income, credit is withdrawn, and demand is therefore withheld from the economy, we need government to step in and fill the spending void left by the private sector saving. Not to do so would lead to private incomes being destroyed, due to withheld demand, which leads to a vicious spiral of more people not spending, and more demand being withheld from the economy.

Government budget deficit spending is also integral in an economy that experiences trade deficits. Someone has to spend the currency into existence that the surplus country eventually siphons out of the trade deficit country. Otherwise, the exiting of currency from the trade deficit economy leads to loss of circulating currency that could lead to loss of aggregate income.

Tom Hickey had a comment I find important to highlight: "fiscal balance is determined by two factors, domestic private desire to save and the ROW's desire to save in the country's currency."

In other words, whenever we see ROW's (rest of world's) increased desire to save in a first country's currency (e.g., the U.S.), ROW's normal reason is not to save in first country's currency, but to create jobs for ROW's own citizens. This need not come at the expense of jobs at first country, for if its government keeps spending to fund both the ROW desire, and to maintain its own citizens' local jobs, ROW will eventually realize that the savings it accumulates with its surpluses with first country is worth nothing, and will probably just cause inflation in its own economy, unless it starts spending it back on first country's production, too.

4. Should government set market interest rates. More often than not, we've seen government intervention in this area only creates speculative bubbles and unnecessary recessions, which would have otherwise been avoided, if government had only let the market decide the price level of interest rates. This control of the monetary rates subjects the entire economy's price level and inflation/deflation on the whims of a few technocrats with little or no accountability to the people. I believe this has to change. I previously made my stance on monetary policy evident here, here, here, here in the last few months alone.

We should start focusing more on what macroprudential controls should be in place once instead, so that private sector-led bubbles do not get out of hand either. And we should make the central bankers, if they will retain control of rate-setting, more transparent and accountable to the people.

There has actually been a proposal by some MMTers to do away with government debt issuance. Since state currency is no longer backed by the gold standard, it can fund any level of spending it wants without need to go into debt or collect taxes. It just has to print the money needed to pay for its expenditure. (With a corresponding ability to suck money back out of the economy via taxation).

If the government no longer determines the risk free rate via issuing government bonds, then private sector capital markets and debt interest rates would likely be determined purely by the market-assessed risk of a particular business or investment, not by how much premium investors want over a riskless government option.

I'm not yet sure of the positive over-all effects of taking out government debt issuance entirely (we would be taking away risk-free investments for pensions and and insurance firms). But interest rate-wise, this takes government out of the rate-setting realm altogether.

Update: W asks: "Please, a yes or no answer, do we have the right amount of government involvement in today's economy?"

Rather than right amount of government(which is not the right context), these are my positions on the whether we have the right approach of government on the four points I outlined:

1. No. We regulate the wrong areas, and focus too much on rules rather than principles. Hence, It's easy to game the regulators, and this has led to too many crises. Regulators should have the common sense if the spirit of a regulation has been broken, and they should be more empowered to enforce that spirit.

2. Yes. And the state should continue being the issuer of currency.

3. No. Government spends more during a boom than on a depression. That's because they think too much that they are only sharers of the currency with the private sector, rather than its issuer. So they spend when they think they have the tax funds, and refuse to spend when they lose the tax base (though during a depression is when they should be spending more, to recharge the tax base).

Tuesday, May 17, 2011

This post is a comment on extreme libertarianism. We encounter it quite often lately on the internet. Extreme libertarians are people who hate government so much that they want to get government of of their lives as much they can. They want it out of public spending, out of 'taxing and spending',out of the money supply, out of regulation. There's a group out there who believe that the best societal order can be achieved by giving maximum liberty to individuals, and respecting property rights over human rights(other people's).

But I fail to see how these people's ideal of a progressive, highly productive society can be achieved by reducing government to the extent that they advocate. Sure, our current crop of government bureaucrats and politicians leave much to be desired, but the the solution to a failure of government is a change of government authorities, not a scaleback of government.

To illustrate my skepticism on the effectiveness of a severely restricted government, I list some highlights from history.

1. Fall of the Roman Empire

The fall of the Roman empire would be a good illustration of what happens when a strong central government, one that dictates the mores and regulations of all facets of the peoples' daily lives, suddenly vanishes. This did not lead to a libertarian paradise composed of men equally predisposed to chase his own individual wealth and success while respecting natural law and other people's rights. No, its fall left a large void that was soon filled by strong regional warlords and potentates, each conquering and defending its territory via a constant readiness to go to war. Those not strong enough to become warlords, or to comprise their immediate circle of vassals and knights, became peasants. Just about everybody in the ensuing new order became indentured servants and slaves of the warlords, in exchange for their protection and patrimony. Liberty did not flourish. The concept of citizenship was all but forgotten, and replaced with a feudal system where those who found themselves born to the peasant class have no chance of ever moving up in society.

The same thing can happen if government gets out of the way completely, and let the free market run the economy as it deems. There will be increased competition, yes. But if you think this will be the sort of gentleman's competition usually seen in a regulated economy, you obviously have never found yourself in the thick of the fight to the death nature of unfettered capitalism.

2. The wild west US frontier

Many extreme libertarians seem to romanticize the conditions found during the 1800's, the time of the Wild West frontier in the US. During that time, there was a mad rush to settle unclaimed lands, and the greatest rewards went to those pioneers who worked hard and braved whatever dangers and difficulties came with settling and taming a wild frontier. A kind of comon understanding was reached to respect each person's settled property, but the land can only be

settled once. Once newcomers found that the most fertile land had already been settled by firstcomers, you 'll find that in the remotest regions not easily accessed by government authorities, you had to be able to defend yourself and your property with a gun. Everybody coming later had to work as servants and virtual employes of those pioneers who can now extort rents on their landholdings from those who would work to till the land.

Similarly, in a market unfettered by prudent regulation, there will initially be a land rush by the earliest and the fiercest, followed by a lack of opportunity for those who come later, as these people find natural monopolies have effectively developed, and erected high barriers to entry to any upcoming wannabe competitors.

3. First Nations people

In my opinion, among the only true people to have achieved a libertarian ideal were the First Nations people. They lived in a world devoid of concepts of property, therefore, they did not know of debt, and the indenture it can put on a borrower. They respected the limits of nature, and never consumed more than was necessary. They did not find the need to maximize 'utility' or profit, and therefore, never found the need to corner a bigger chunk of the pasture or to fish as many as they can without regard for tomorrow. In their society, there was no 'tragedy of the commons' and therefore their chiefs found no compelling need to regulate or enforce individual tribesmen's behavior. They lived like this for generations. Look what happened to them when early European settlers came and claimed all the unclaimed land.

Similarly, just because well-meaning libertarians may choose to pursue their individual liberties without impinging on the rights and liberties of others, it doesn't mean that no one with greater greed will come along at some point and shake things up. Without government to enforce justice and order, where does this leave them?

If you go back to posts up until the beginning of this blog, you will find that I am no central planning advocate. Far from it, I recognize that the best innovation that leads to economic progress usually come from the 'creative destruction' spearheaded by entrepreneurs. But to create the environment necessary for market and social stability that creates a business environment conducive for investment, there should be a strong government, albeit one that doesn't act as a vassal of entrenched interests.

Friday, May 13, 2011

John Quiggin has a post inviting MMTers to comment on a set of propositions he listed as defining hard Keynesianism. He wants to know how Chartalism differs from the propositions, as a starting point for him to begin his understanding of Chartalism/MMT.

There are two entities that can create money in the economy - the government, via public spending, and the banks, via loan creation. During normal times, a responsive but prudent government should incur a small deficit, large enough to buy the services of a vital sector of the economy. This sector that primarily benefits from government spending, whether public employees, government contractors, or what have you, then turn around and spend this income on other goods and services provided by other members of the economy. On the basis of these various incomes created, banks can lend to the private sector, so that this sector can engage in the investments needed to grow the economy, and create more private income, without further need for government spending.

I believe there is a stable level of government deficit that promotes growth. It's a deficit level just large enough to create private incomes to make private businesses stable, and willing to hire more people, and thus leading to a positive spending multiplier.

Yes, I agree. Once initial government spending has been done, the resulting positive spending multiplier should lead the private sector spending and investment to take over from there. The resulting flow of money in the economy should already ensure adequate incomes for all.

Nick Rowe has what I find is a helful illustration to explain this-think of backscratcher economy. Think of an economy composed of ten backscratchers, where everybody earns income by providing backscratching services to one another. On the side, four of them earn additional income by buying and selling houses and financial assets among each another, funded by borrowing. For some reason, someone becomes greedy and buys houses for more than they usually sell for.

Because this resulted in a windfall to the person he bought the house from, this causes others to believe that there is money to be made from buying and selling houses. This cascades into a boom, until prices are no longer supportable by straight backscratcher income. If those four backscratchers found themselves over-indebted because they kept on buying houses in the run-up of prices, they now will no longer be buying backscratches, and will save money to pay down their debt.

If four of ten backscratchers are now no longer buying backscratches, then the remaining six people can no longer all earn the same backscratch income as before. In all likelihood, four people will not be getting income, and they in turn will stop buying backscratches from others. In this scenario, the backscratcher economy is in danger of deflating into zero backscrcratches, unless the government steps in and buys some backscratches.

Because the government has to step in and buy some more backscratches, whereas before it probably just bought one scratch, it will end up injecting more money into the economy, to make up for the backscratching income now being hoarded by the over-indebted. So yes, I agree that money creation as a source of finance for public expenditure is only significant during times of depression, when a significant part of the private sector is withdrawing money from the economy.

Not necessarily. It can be financed by just creating more money. MMTers claim that all money in the economy has been spent into existence by the government.

It's probably true, if you consider that banks are able to fund their loan creation, when amounts are in excess of existing interbank loans, by borrowing from the Central Bank. When the Central Bank creates money via these loans, it effectively is a liability of the government (in the sense that when any holder redeems it from the government, the government can pay for it with tax payment credits).

As far as I know, government spending IS part of GDP. So at the minimum, we need to see that every $1 of government debt is due to $1 of actual government spending. In order that debt does not grow faster as a percentage of GDP, there should be a positive multiplier effect. So government needs to be careful what it spends money on.

For as long as the government is spending to purchase the services of people who will in turn spend it into the economy, there should be a multiplier effect on government spending. In the backscratcher economy, government should spend it on backscratchers who will readily turn around and buy backscratches from others. This means buying four backscratches from the four individuals who would have otherwise had no income because of those hoarding their income.

Government should should not spend it buying the houses from those over-indebted backscratchers, because they might not spend the income they get from government buying other backscratches, but use it to buy even more houses.

My position is: The larger the bust, the larger the deficit. The smaller the bust, the smaller the deficit. When there is a backscratcher boom, due to productivity improvements, government could incur a surplus. The larger the boom, due to an asset boom, the more it needs to regulate asset speculation.

Ideally, the growing tax base of a growing private sector economy is what leads to deficit reduction, not cuts in government spending. Because if the government cuts its one unit of backscratch demand, this could cascade to less aggregate demand for scratches in the larger economy.* reposted due to Blogger outage

Update: Tom Hickey gives more nuance in comments on the full mechanism of how Treasury spending, via crediting bank reserves with the Fed, creates currency.

"Banks are only able to create credit money (loans create deposits) because they have access to the settlement system, in the US, the FRS, and they need to obtain both reserves for settlement and vault cash to meet customer demand. So while banks can create money through extending credit, it is not spendable without government high powered money for settlement.

High powered money comes from currency issuance. When the Treasury injects net financial assets through deficit expenditure, then bank reserves increase correspondingly, since the central bank provides reserves to clear. Treasury security issuance is operationally unnecessary. It drains reserves so that the cb can hit its target rate. This simply changes the composition and term structure of govt. liabilities without affecting NFA. The same could be accomplished by the Fed paying a support rate on excess reserves equal to the target rate, making tsy issuance unnecessary to drain reserves. Should the political authority so choose, Treasury could be authorized to issue currency directly as notes in addition to the coin that it presently issues."

Friday, May 6, 2011

Anonymous commenter made this interesting comment in my previous post on the gold standard. "Also, as far as I understand it, most of the people advocating a return to the gold standard advocate it primarily as their recommendation if their must be a government mandated monopoly on currency. Most of them prefer an open marketplace in currency, where anyone could use whatever they like as a medium of exchange, and banks could print certificates tied to real assets usable as paper money (whether it be gold, silver, palladium, yap, or cigarettes, though those last two are included primarily for historical reference). This would not include the same problems you've included above, but still answer the criticism of fiat currency by allowing for currency that was backed by some tangible asset rather than being provided value through the government's power to tax."

My beef with a multi-currency system is the difficulty of ensuring orderly currency issuance. We'll have an economy with so many currencies being issued by different private banks, backed by different assets.

At least, with only one monopoly issuer, we can easily control it by making it more accountable to the people who use the currency it issues (Though this means making central banks more transparent than they are right now). If we have many private banks issuing their own currencies, it would be more difficult to manage. What happened to securitized loans issued by shadow banks could also happen to the currencies privately issued by banks. With no state backing them, privately-issued currencies could just as easily lose value during a run, and we could end up with financial crises even worse than we had in 2008.

For example, if we cannot assure that a lone central banker, whose actions are readily seen by all, will never overprint a monopoly currency, then we cannot also assure that different private bankers will never overprint a currency, to the point that they cannot back it anymore with their holdings of tangible assets.

I would probably be open to the idea of granting private banks the license to issue private money, but these private currencies should be complemented by state-backed money. Sure, there could be sophisticated investors out there who can ascertain the solvency and veracity of an issuing bank's claim, that its holdings of real assets can back its privately-issued currency. But the typical currency user, who just needs a readily usable medium of exchange, or store of value, likely will not be in a position to know which bank will still be around to give him the real assets, should he ever decide to tender his currency notes. So he should have the option of only accepting a state-backed currency, so that he at least has the peace of mind about the backing of his accepted currency (Even if this state-backed currency can be overprinted by an overzealous central banker. But that's a matter for a separate discussion.)

In as far as why a state-backed currency should not based on gold, I've already outlined it here. Plus I would add that the state's option to be able to spend more, in place of disappearing private spenders during times of escalating private sector desire to save, is an invaluable lifeline during a severe depression, and if we had a gold standard, government spending will only likely crowd out what little private spending is still there.

Tuesday, May 3, 2011

In my last post, one commenter, Anon, had this queston "The ability to create money is far too much concentrated power to be in the hands of the government or the elite that control the government.....I'd like to hear from MMT theorists how to control the genie once it's out of the bottle rather than how to get the genie out".

Since we know the genie is already out(it was let out by the Western powers during the 1930's depression, and by the US in 1971), we should start focusing more on what macroprudential controls should be in place to ensure politicians or central bankers do not abuse this power. On the international front, Nations of the international comunity could also enforce this discipline on one another via having international trade payment agremeements, like this IMF Articles of Agreement Article VIII, Section 4 as pointed out by Ramanan. Convertibility of foreign-held balances.

I found it an interesting clause. I think the IMF agreement authors understood the fiat nature of money, printed at will or necessity by the various trading nation-states. That’s why they had to put that clause in there. They likely foresaw that some nations in future might overexport and oversave in another's currency, while some would over-consume and over-issue their own currency. The clause ensured that nations always keep a reserve of its trading nation partners' currencies so that they could pay for their own imports later on with partner nation's own currency. Minding this clause should have prevented the unbelievably skewed global trade imbalance we now have.

The US completely ignored the threat of being asked to convert its debt in its trade partners’ currencies. Although, to be fair, why would it when the world knew it issued the global default currency. It probably also knew that no nation on earth will cut off its nose to spite its face, and demand payment that it knows the US cannot and will never be able to pay. (Pay for counterparty nation's dollar holdings with counterparty's own currency).

But now that several economists have been calling for the world to shift to a new global default currency (preferably one based on special drawing rights), perhaps we could end the world-wide fetish for hoarding US dollar, and we could finally see this clause acting as a useful macroprudential control on fiat, as a means, at least, of funding continuous trade deficits.

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"Conventional approaches, unconventional conclusions" on the global finance and economic issues of the day. Rogue Econ has been a banker and financial consultant in several countries. Welcome to my blog.